What taxes do I pay when selling a rental property in San Diego?

Four layers stack: federal long-term capital gains at 0%, 15% or 20%; depreciation recapture at up to 25% on depreciation taken or allowable; the Net Investment Income Tax at 3.8% above modified AGI of $200,000 single or $250,000 married filing jointly; and California income tax from 1% to 13.3%, since California applies no preferential capital gains rate.

What is depreciation recapture on a rental property sale?

Depreciation you deducted while owning the rental is recovered at sale and taxed at up to 25% as unrecaptured Section 1250 gain, separately from capital gain. If depreciation was not claimed but was allowable, the calculation generally still assumes it was taken.

Does a 1031 exchange eliminate capital gains tax?

No. A properly structured 1031 exchange defers federal capital gains, depreciation recapture, the Net Investment Income Tax and California tax rather than eliminating them. The tax moves to a later taxable disposition.

Can I start a 1031 exchange after I sell my property?

Generally no. A qualified intermediary must be engaged and the exchange agreement signed before the relinquished property sale closes. Once the proceeds have been received, the exchange is generally lost with no retroactive fix.

Does California tax a 1031 exchange into an out-of-state property?

California tracks California-source deferred gain through its clawback provision and can tax it when the out-of-state replacement property is later sold in a taxable transaction. California also generally requires FTB Form 3840 annually while the gain remains deferred.

Can I 1031 exchange into a Delaware Statutory Trust (DST)?

Yes. Under IRS Revenue Ruling 2004-86, a beneficial interest in a properly structured Delaware Statutory Trust is treated as an interest in real property for Section 1031 purposes, so it can serve as replacement property. A DST suits owners who want tax deferral without property management, and can also absorb leftover proceeds or serve as a backup identification. Tradeoffs include illiquidity over a typical five to ten year hold, no control over the asset, layered fees, operating restrictions, and sponsor risk. DST interests are securities offered through a registered representative or broker-dealer, generally to accredited investors.

When is it better to pay the tax than do a 1031 exchange?

When the owner wants to exit real estate entirely, when the total gain and therefore the tax is modest, when no suitable replacement property is available inside the 45-day identification window, or when estate planning considerations such as a stepped-up basis for heirs change the analysis.

Selling a San Diego Rental: What the Tax Bill Actually Looks Like

If you have owned a San Diego rental for fifteen or twenty years, you are not really deciding whether to sell. You are deciding whether to write a check for a third of your gain. Most owners I talk to have a rough number in their head for what they will walk away with, and it is almost always too high, because they have forgotten about depreciation recapture.

Last reviewed October 2026 by Twana Rasoul, DRE# 02026495

What this page is and is not. I am a real estate agent. I am not a CPA or a tax attorney, and nothing here is tax advice. The numbers below are an illustration using published 2026 rates, meant to show you the shape of the problem so you ask your CPA better questions. Your actual bill depends on your basis, your depreciation history, your other income, and your filing status. Run your real numbers with a qualified CPA before you do anything.

The four taxes, not one

When people picture the tax on selling a rental, they picture one number: capital gains. There are actually four layers, and they stack.

Layer	Rate	Applies to
Federal long-term capital gains	0%, 15% or 20%	Your gain above basis. In 2026 the 20% bracket starts at $545,500 of taxable income for single filers and $613,700 for married filing jointly, and a large sale often pushes you there by itself.
Depreciation recapture	Up to 25%	Every dollar of depreciation you took, or were entitled to take, over the years you owned it. This is the layer people forget.
Net Investment Income Tax	3.8%	Investment income once modified AGI passes $200,000 single or $250,000 married filing jointly. Those thresholds are not indexed to inflation.
California income tax	1% to 13.3%	California has no preferential capital gains rate. The gain is taxed as ordinary income on top of everything else you earned that year.

Depreciation recapture is the one that gets people. If you took depreciation, you owe recapture on it when you sell. If you did not take it, the IRS generally still calculates as though you did. A long hold means a large depreciation balance, which means a large recapture bill sitting underneath a gain you were already expecting to be taxed on.

What that looks like on a real San Diego duplex

Illustration only. Assume a duplex bought in 2005 for $450,000, with roughly $100,000 of that allocated to land, sold today for $1,300,000.

Line	Amount
Sale price	$1,300,000
Less selling costs at roughly 6%	($78,000)
Net proceeds	$1,222,000
Depreciation taken over 21 years	$267,273
Adjusted basis	$182,727
Total gain	$1,039,273

Now the four layers:

Tax	Amount
Depreciation recapture on $267,273 at 25%	$66,818
Federal capital gains on $772,000 at 20%	$154,400
Net Investment Income Tax at 3.8%	$39,492
California at 9.3% to 13.3%	$96,652 to $138,223
Total tax	$357,363 to $398,934
You keep	$823,066 to $864,637

That is roughly 34% to 38% of the gain, gone. On a property where the owner was thinking "I'll clear about a million."

The recapture line is the surprise for most people. It is $66,818 that does not exist in anybody's mental math, and it is there precisely because the property performed well as a rental for two decades.

What a 1031 exchange changes

A properly structured 1031 exchange defers all four layers. Not reduces, defers. You roll the full proceeds into replacement investment property, and the tax moves to a later date instead of coming due this April.

In the example above, that is roughly $357,000 to $399,000 that stays working in real estate instead of going to the IRS and the Franchise Tax Board. On San Diego pricing, that difference is most of a down payment on a second property.

The mechanics, the 45-day and 180-day deadlines, and the identification rules are covered in detail on the 1031 exchange guide. The short version: you cannot touch the money, a qualified intermediary has to be in place before your sale closes, and the clock starts the day you close.

The single most expensive mistake is timing. If you close your sale and take the proceeds, the exchange is generally gone. There is no retroactive fix. Every year people call a CPA in February about a property they sold in November and find out the option expired at the closing table. If there is any chance you want to exchange, that decision has to be made before you list, not after you are in escrow.

Why California makes staying local worth a look

California has a clawback provision. If you exchange California property for replacement property in another state, California tracks the California-source deferred gain and can tax it when that out-of-state property is eventually sold in a taxable transaction. Moving to Texas or Nevada does not clear it, because the obligation follows the deferred gain rather than your residency.

Alongside it, California generally requires FTB Form 3840 to be filed for the exchange year and every year after, for as long as the gain stays deferred, even if you have no other reason to file a California return.

That does not automatically make San Diego the right replacement market. It does mean that the spreadsheet comparing a San Diego fourplex to an out-of-state property usually understates what the out-of-state option really costs. Have your CPA model it properly.

When paying the tax is the better answer

I would rather tell you this before you hire me than after.

You want out of real estate entirely. A 1031 into another building keeps you a landlord. If the goal is to stop managing property, buying a fourplex does not accomplish that. There is a middle path worth knowing about, covered in the next section.
Your gain is modest. If the total tax is $40,000 rather than $400,000, the cost and constraint of an exchange may not be worth it.
Nothing good is available inside your window. A bad replacement property is a long time to live with a tax deferral. Paying the tax and waiting is sometimes the right call.
Estate planning changes the math. Heirs may receive a stepped-up basis, which is a reason some owners hold rather than either selling or exchanging. That is a conversation for your CPA and estate attorney.

If any of those describe you, the honest answer is that you need a good listing agent and a good CPA, not an exchange.

The middle path: exchanging into a DST

There is a third option between "buy another building" and "pay the tax," and it is the one most owners have never heard of.

A Delaware Statutory Trust, or DST, is a structure that holds institutional real estate, typically larger apartment, industrial, medical or retail property, and sells fractional beneficial interests in it. Under IRS Revenue Ruling 2004-86, a beneficial interest in a properly structured DST is treated as an interest in real property for Section 1031 purposes. So you can exchange into one and defer the same four layers of tax.

The difference is what you own afterward. You are a passive beneficiary, not a landlord. No tenants, no repairs, no 2 a.m. calls. Distributions arrive, or they do not, depending on how the property performs.

Where it genuinely fits

You want the deferral without the management. This is the main case, and it is the honest answer for the owner in the first bullet above who wants out of being a landlord but does not want to hand over a third of the gain to do it.
You have leftover proceeds. If your replacement property costs less than what you sold, the difference is taxable boot. A DST can absorb that remainder, since minimums are far smaller than a whole building.
You need a backup identification. This one is underused. Under the three-property rule you can identify a DST alongside the buildings you actually want. If your primary deal falls apart on day 40, you have somewhere the exchange can still land instead of failing entirely. DST closings are typically fast because the property is already acquired and the structure already exists.

The tradeoffs, which are real

This is not a free lunch, and anyone presenting it as one is selling. You give up control completely. The sponsor decides when to sell and how to operate. Holds commonly run five to ten years, and there is no meaningful secondary market, so your capital is locked up. Fees at the acquisition, management and disposition stages reduce returns, and a couple of points a year compounds against you over a decade. The structure carries operating restrictions, often called the seven deadly sins, that limit the trust's ability to renegotiate leases or replace tenants, which can hurt when a tenant fails. Outcomes depend heavily on the sponsor's quality. And the favorable tax treatment rests on a revenue ruling, which carries its own risk over a long hold.

Compare that honestly to owning a San Diego duplex outright. With the duplex you control the asset, you can refinance it, improve it, raise rents, or sell it next year. With a DST you control none of that. Which one is better depends entirely on whether you want to be an operator or an owner.

This one is outside my lane, and I want to be direct about that. DST interests are securities, not real estate. They are offered through a registered representative or broker-dealer, generally to accredited investors only. I am a real estate licensee. I am not licensed to sell, recommend, or advise on DSTs, and I do not receive compensation if you invest in one. What I can do is tell you this option exists, make sure you raise it with your CPA, and point you toward licensed people who handle it. The evaluation itself belongs with them.

What your property would actually sell for

The tax question is downstream of a simpler one: what is the property worth, and what would it realistically trade for right now.

San Diego County 2-4 unit property has been trading mostly in the low seven figures. My current working collection of county inventory holds 94 properties ranging from $800,000 to $1,800,000, with a median around $1,299,000. Average days on market for 2-4 units has been running in the six-week range.

If you are weighing a sale, the useful first step is a real valuation of your building based on its unit mix, rents, and condition, not a Zestimate. That tells you the gain, which tells you the tax exposure, which tells you whether an exchange is even worth considering.

What I do here. I will value your property properly, tell you what it would realistically sell for and how long it would take, and walk you through what the exchange timeline would look like if you went that route. If you decide to exchange, I source the replacement property and keep the intermediary, the lender, and both escrows moving so a deadline does not slip. If you decide to just sell, I will tell you that too and we will list it.

Thinking about selling a San Diego rental?

Tell me the address and roughly when you bought it. I will give you a realistic value, what it would take to sell, and an honest read on whether a 1031 makes sense for your situation before you talk to your CPA. No pressure and no obligation. The worst outcome is finding out your options after you have already closed.

Get a valuation and an honest read

Common questions

What is depreciation recapture and why do I owe it?

Each year you owned the rental, you deducted a portion of the building's value against your income. When you sell, the IRS recovers the benefit of those deductions by taxing that amount at up to 25%, separately from your capital gain. Importantly, if you did not claim depreciation you were entitled to, the calculation generally still assumes you did, so skipping it does not avoid the recapture.

Can I avoid capital gains by moving into the rental before selling?

Converting a rental to a primary residence changes the analysis, but the rules around the primary residence exclusion for a property that was previously a rental are specific and include limits tied to the period it was not used as your residence, plus depreciation recapture that is not excluded. This is a real strategy in some situations and a trap in others. It is a CPA question and worth asking early, because it involves a multi-year holding period.

How much does a 1031 exchange cost?

Qualified intermediary fees for a standard delayed exchange are commonly quoted around $1,000 to $2,500, with reverse and improvement exchanges costing more. Against a six-figure deferral, the fee is rarely the deciding factor.

Do I have to buy something more expensive than what I sold?

To defer the full amount, your replacement property generally needs to be of equal or greater value with equal or greater debt replaced. You can buy something cheaper, but the difference, called boot, is generally taxable. Your CPA will model what partial deferral actually costs you.

Can I exchange one property into several?

Yes, and in San Diego it is common. Selling one appreciated property and acquiring two or three smaller income properties spreads tenant risk and often improves total rents. See current replacement property inventory for what that looks like in practice.

What is a DST and can I 1031 into one?

A Delaware Statutory Trust holds institutional real estate and sells fractional beneficial interests. Under IRS Revenue Ruling 2004-86, a beneficial interest in a properly structured DST is treated as real property for Section 1031 purposes, so it can serve as replacement property. It suits owners who want the deferral without the management, and it can absorb leftover proceeds or serve as a backup identification. The tradeoffs are real: illiquidity over a five to ten year hold, no control over the asset, layered fees, and sponsor risk. DST interests are securities offered through a registered representative, generally to accredited investors. I am not licensed to sell or advise on them.

Can I identify a DST as a backup in case my main deal falls through?

This is one of the more practical uses. Under the three-property identification rule you can name a DST alongside the buildings you are actually pursuing. If your primary deal collapses late in the 45-day window, the exchange has somewhere to land rather than failing. DST closings are generally quick because the property is already owned by the trust. Structure the identification with your qualified intermediary and your CPA.

What if I already have a buyer lined up?

That is fine, and it does not prevent an exchange, but it makes the timing more urgent rather than less. The qualified intermediary has to be engaged and the exchange agreement signed before that sale closes. Call your CPA this week, not next month.

Is it worth selling at all right now?

Depends entirely on your property, your rents, and what you would do with the proceeds. Sometimes the answer is to refinance and hold. I will give you a straight read on your specific building rather than a market opinion, because the market average does not tell you much about one duplex in one neighborhood.

1031 Exchange San Diego: The Complete 2026 Guide covers the rules, deadlines, and real client examples end to end.
San Diego 1031 Replacement Properties shows current 2-4 unit inventory and what the 45-day window looks like against real supply.
San Diego Duplex & Multifamily Buyer's Guide covers evaluating 2-4 unit property.

Sources

IRS long-term capital gains rate brackets for 2026, and unrecaptured Section 1250 gain at a maximum rate of 25%
Net Investment Income Tax, IRC Section 1411, 3.8% above modified AGI of $200,000 single and $250,000 married filing jointly
California Franchise Tax Board, personal income tax rates; California does not apply a preferential capital gains rate
IRC Section 1031 and IRS Form 8824 instructions, like-kind exchange requirements and deadlines
IRS Revenue Ruling 2004-86, treatment of Delaware Statutory Trust beneficial interests as real property for Section 1031 purposes
Six Risks of Delaware Statutory Trusts in 1031 Exchanges, Kiplinger
California deferred gain provisions and FTB Form 3840 instructions

About the author

🏆 RealTrends Verified 2025 - #4 in San Diego by transactions | #7 by volume
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200+ families served | 350+ units closed | $250M+ in transactions | DRE# 02026495

San Diego native, duplex and ADU specialist, and an investor here myself. I have helped clients roll millions into San Diego income property on exchange timelines, and I have also told people not to exchange when it was not the right move.

Twana Rasoul, DRE# 02026495 | Compass | 619.792.8295 | twana.rasoul@compass.com
8889 Rio San Diego Dr., Ste #200, San Diego, CA 92108

This page is general information for San Diego property owners. It is not tax, legal, or accounting advice, and no advisor relationship is created by reading it. I am a real estate agent, not a CPA, tax attorney, or qualified intermediary. All figures are illustrative, based on published 2026 rates, and will not match your situation. Tax law and rates change. Consult a qualified CPA about your own numbers before making any decision.